Duties & Liability of Parties When a Negotiable Instrument is Forged or Altered

Question 1

Duties of Drawee Bank

Answer 1

• honor customer’s check if there are sufficient funds
• can honor a check w/o sufficient funds, in which case the customer is liable to the bank for the overdraft
• if bank wrongfully dishonors a check, customer can recover damages for harm proximately caused
• death of customer does not revoke bank’s authority to pay a check until bank (1) knows of the death, and (2) has a reasonable time to act on that knowledge
• CANNOT charge customer’s account: (1) if drawer’s sig was forged; (2) for more money than the original order; (3) if the bank pays the wrong person; (4) if the Bank pays a post-dated check
• an ORAL stop payment order is binding on the bank for 14 days unless renewed in WRITING w/in that period.
• a WRITTEN stop payment order is binding for 6 months, renewable every 6 months in writing.
• if bank pays in spite of a stop payment order, customer has the burden of proving that a loss has occurred, and the amount of the loss

Question 2

• Forgery or Material Alteration of Negotiable Instruments:

WHEN IS IT DONE?

Answer 2

Writing or signing w/o authority

ex- an employee signs employer’s name w/o authority
ex- someone steals your checkbooks and writes checks

Question 3

• Forgery or Material Alteration of Negotiable Instruments:

THE PROPERLY PAYABLE RULE

Answer 3

the drawee bank that honors a forged or materially altered check must recredit the drawer’s account, aslong as the drawer was not negligent

Question 4

• Forgery or Material Alteration of Negotiable Instruments:

THE DRAWEE BANK’S REMEDIES

Answer 4

• thief is always liable

- drawer is also liable if negligent

Question 5

• Forgery or Material Alteration of Negotiable Instruments:

WHEN IS THE DRAWER NEGLIGENT?

Answer 5

• leaves blanks or spaces on the instrument
• failing to follow internal procedures designed to avoid forgeries
• failing to examine one’s bank statement (bank statement rule)
• if an imposter induces the drawer to write a check

Question 6

• Forgery or Material Alteration of Negotiable Instruments:

THE BANK STATEMENT RULE

Answer 6

Negligence includes failure to examine one’s bank statement. If a customer fails to REPORT a forgery or alteration within a REASONABLE time, he or she is ESTOPPED from demanding recredit from the bank.

Question 7

• Forgery or Material Alteration of Negotiable Instruments:

THE EMPLOYEE INDORSEMENT RULE

Answer 7

An EMPLOYER is liable for forgeries by an EMPLOYEE who was ENTRUSTED w/ responsibility for HANDLING CHECKS.

[Negligent b/c failed to follow internal procedures to avoid having this person make forgeries, such as having their checks reviewed by a second party]